Originally published by Rivkin Securities
A private US employment report by ADP on Thursday suggested that 153,000 jobs were added between November and December slightly below the 2016 average of 174,000. There are some signs that the strength of gains in employment is fading, although this is to be expected following a seven year recovery that has seen the unemployment rate drop from 10% to 4.6%. The figures were lower than the market was anticipating, with expectations for a gain of 175,000 and comes ahead of the all-important non-farm payrolls (MoM Dec) on Friday where expectations are also for a reading of 175,000.
In reaction the U.S. dollar index weakened -1.19% falling with the US 10 Year T-Note which declined -8 basis points to 2.3716%, as did the US 2 Year T-Note down -5.5 basis points at 1.1780%. Adding to the selling of the US dollar overnight was action by Chinese policy markers which boosted overnight borrowing costs up to as much as 30% in order to defend the Yuan. Such high borrowing costs make it unprofitable and painful for short sellers who quickly cover their positions. The offshore Yuan (CNH) gained +1.19% taking its two day advance to +2.5% as it pulls back for the important psychological level of 7 while the official fix for the onshore Yuan (CNY) was +0.65% stronger. This move by Chinese policy makers is a clear signal to those betting on a devaluation that they are serious about their commitments to maintaining a stable currency in 2017.
The weaker dollar is providing some much needed relief for precious metals spot gold and silver which have been absolutely hammered over the past few months, with gold jumping +1.48% overnight and silver also up +0.85%. The first chart below highlights both the precious metals, which appear to have formed a near-term low opening up the decent probability of corrective moves higher in the coming 1-2 weeks.
Both Crude Oil and Brent crude oil, shown on the second chart below, were +0.96% and +0.71% higher at the time of writing following declines in OPEC production according to a Reuters survey and a larger than anticipated draw in U.S. crude oil inventories. The Reuters survey suggests that OPEC group production decreased by 200,000 barrels in December to 34.18 million ahead of an agreement to reduce output to 32.5 million barrels starting from January 1st. US data showed that crude oil inventories for December 30th fell 7.051 million barrels, larger than the 2 million decline forecast although this was offset by larger pickups in gasoline and distillate inventories.
For oil prices attention will now be on two factors, 1) Whether OPEC successfully monitors and enforces allocated production cuts and 2) The rising Baker Hughes US rig count. The number of active rigs has risen to 525 in December from the May 2016 low of 316 as higher oil prices make it profitable to pump oil again and that should keep oil prices capped to US$60 in the near-term.
Locally the S&P/ASX 200 finished +0.3% higher at 5,753.35 and we can expect a modestly stronger start to trading this morning with ASX SPI200 futures up 9 points in overnight trading.
Data releases:
· Euro-zone Economic & Consumer Confidence (MoM Dec) 9:00pm AEDT
· Euro-zone Retail Sales (MoM & YoY Nov) 9:00pm AEDT
· U.S. Trade Balance (MoM Nov) 12:30am AEDT
· U.S. Non-farm Payrolls , Unemployment Rate and Average Hourly Earnings (MoM Dec) 12:30am AEDT
· U.S. Factory & Durable Goods Orders (MoM Nov) 2:00am AEDT
· U.S. Baker Hughes Rig Count (Jan 6)
Chart 1 – XAUUSD (Blue) & XAGUSD (Purple)
Chart 2 – Brent (Blue) & WTI (Purple) Crude Oil
